Sample Paper

Long Term Financing (Feb 5^th, 2011) – End Term Examination

Prof. Dipinder Randhawa

Duration: 1.5 hours

Instruction: Closed Internet, Open Laptop, Soft-Copy Submission

Please read the questions carefully before writing your responses

The questions require brief, considered responses. Please answer the question that has been asked (confine your response to the specific question that is asked). A premium will be placed on brief, cogent, well-reasoned responses. You have 90 minutes to complete the exam. Feel free to use graphs, diagrams, tables, etc. to substantiate your responses

The grade will be based on your understanding of the issue, the ability to articulate and synthesize different perspective, on how well the essay is structured, lucidity in writing, research effort, and the ability to illustrate the assertions with real examples. Please answer the questions on this sheet

Question 1

From: “Bank finance vs. Bond Finance. What explains the difference between the US and Europe? European Central Bank, Working Paper No. 547 / November 2005”

….Empirical evidence suggests substantial differences in the financial structure across countries. For instance, the traditional distinction between bank-based and market-based financial systems applies to the Euro area and the US. Investment of the corporate sector relies much more heavily on bank finance in the Euro area than the US. In 2001, bank loans to the corporate sector amounted to 42.6% of GDP in the euro area, and to 18.8% in the US. Conversely, outstanding debt securities of non-financial corporations and stock market capitalization amounted respectively to 6.5 and 71.7% in the euro area, and to 28.9 and 137.1% in the US.

……We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per capita GDP.

How can we account for the cross-country differences in financial structures? In a given economy, what factors would influence the choice between bank financing and equity financing? Introduce the role of information asymmetries in your response.

Question 2

FirstMac takes first offshore RMBS on the road (Asset Securitization Report, April 3, 2006 Rob Davies)

1^st Mortgage group (FirstMac), one of Australia’s largest non-bank RMBS issuers, will soon launch its 7^th securitization but first to feature a non-Aussie dollar trache. HSBC is lead manager on the deal – issued out of the FirstMac Bond series vehicle – with ANZ Investment Bank & Macquarie Bank as co-managers.

Road shows kicked off last Thursday in Singapore, with the European leg – taking place in Brussels, Dublin, Frankfurt, London, Munich and Paris – schedules for this week. The deal is collateralized by a pool of 4,145 loans worth A$ 808.3 million ($574.8 million). The weighted average loan-to-value of the portfolio is 77%, with seasoning of 9.5 months. Mortgage cover is provided by Genworth and PMI Mortgage Insurance.

The transaction comprises of 500 million ($ 604.3 million) senior floating rate tranche, rated triple-A by all 3 agencies, with an expected average life of 2.76 years. An A$50.5 million domestic subordinated tranche is rated double-A for a 7.3 years expected average life. FirstMac last tapped the market in December 2005 with a A$450 million issue led jointly by HSBC and Macquaire. That deal featured a A$ 395 million senior piece, rated Triple-A, which paid 22 basis points over the bank bills swap rate for 2.24 years.

Given that the senior notes on the upcoming deal are euro-denominated, a more relevant benchmark is the 450 million tranche on the recent global offering by Commonwealth Bank of Australia (ASR, 03/13/06). The Triple-A rated notes ended 7 points over Euribor for 2.71 years. As a non bank issuer, however, FirstMac will likely price a couple of points outside that.

What benefits does this deal offer? Who are the different parties to this deal? What role do they perform? What risks do they confront?

(For the sake of brevity, you may, if you wish, construct a table to answer this question?

Question 3

The boundaries between financial markets and financial institutions have increasingly become blurred? Describe some manifestation of this process. How do they impact the challenge of mobilizing long-term finance? How has this phenomenon impacted the challenges associated with mobilizing long-term funds? Please illustrate your response with examples.

Question 4

The huge infrastructure deficit in many developing economies has focused attention on the role of Public Private Partnerships as contractual arrangements that can be used to alleviate the paucity of funds in this critical sector. What are the institutional pre-requisites for the growth of PPP? What sort of financing arrangements / processes / instruments could be used in PPP projects? Try to illustrate your response with examples, real or hypothetical.

Question 5

Why is long term financing a challenge for many economies? What are the risks from the perspective of lenders & borrowers? What role can regulatory agencies play in promoting long-term financing? In your discussion, bring out the factors impeding access to long-term, and how regulatory agencies would address these obstacles.